Economic statistics, GDP, inflation and related criteria

The Sunday Times FT report last week on GDP was good reading. It was a useful diversion from the trivialities of political gossip, crime and disaster that have become our unsavoury staples. However, the debate that has opened up on the significance of the copious references to economic terminologies has been more revealing than enlightening. Let me explain, in brief.

The essence of my "Lament" in "Economics - A layman's Lament" (STFT of 11.03.07) was that certain terms like GDP, Growth and Inflation were being freely bandied about in a manner to confuse, bewilder and deceive the non-specialist reader. They were being used by persons with obviously no clue what they were talking about.To clear the misunderstandings of readers and possible misapplication in the use of these criteria, there was an obligation on the part of the experts to provide convincing proof of the validity of these figures. This they could do by establishing that the base data were accurate, that the deductions did not defy common sense and were of value and utility in planning the future of our country. This of course is the concern of every thinking citizen. I believe there is a coy silence to admitting ignorance.

Why were the references in last week’s report "more revealing than enlightening"? To take the second first (since using language as a barrier to comprehension seems the fashion!) I for one remained as baffled and bamboozled by the lack of any attempt to enlighten, on what I believe cannot be a disability unique to me. I remain as ignorant as I ever was, on the plea in the foregoing paragraph for some reassuring guidance on the manner of collection and processing of the data resulting in the economic criteria derived therefrom. Simply expressed, since these terms are current, please assure the reading public that this currency is not counterfeit! Why it was "revealing" is that it is apparent that the figures trotted out with such abandon and confidence are really more than a little suspect and not as related to precision, reality or usefulness as they pretend to be (explicitly or implicitly). The danger is that notwithstanding this, they are and purport to be the basis for important decisions on running the financial affairs of our nation and thus central to many facets of governance. This is no trifling matter and goes beyond being a harmless intellectual diversion or game.

Among your contributors, Dr Harsha de Silva, Lead Economist of Limeasia and an influential opinion moulder says "People cannot feel the 7.4% growth. What people feel is the high cost of living. The people have been taken for a ride." Then again Sarath Fernando, Moderator for the Movement for National Land and Agriculture Reform says more emphatically that "... the GDP of measuring the country's success in economic performance is 'totally meaningless'.

No amount of argumentative and contorted logic can gainsay the reasonableness of a sane person supposing that a high growth rate is a good thing (unless one is talking of something nasty like a tumour) and that low inflation is also desirable (unless one is a bicycle tyre). It is also useless to assert that the figures are not meant to be taken literally but merely as trend indicators. If so, there is no validity in giving figures - other than to mislead, support falsities or frankly, to cheat. Figures have value in transforming "hunches" or "theories" into facts or at least strong probabilities. If they do not, then remain with opinions - (minimally) informed ones.

The contribution by the Deputy Governor of the Central Bank is central to the debate and warrants somewhat detailed treatment. It postures rather haughtily by scorning "...critics (who) are not aware of the high standards Sri Lanka has to maintain..." This writer is one such and therefore sought guidance. The DG/CB then seeks authenticity by stating that "... the Bank is a signatory to the IMF's GDDS System...." I believe the IMF has not the benefit of universal adoration for its views and advices and history is replete with examples where dicta of authorities have proved to be wrong. He goes on to say that ".... the CB cannot publish one set of data in one year and publish another set of data another year and mislead the readers." I believe the story of the boy who cried "wolf" showed that one should not tell the same lie twice! Goebbels is said to have disproved this truism. It is better to correct deficiencies later than never.

Your columnist, "the Economist" ("7% growth and widespread skepticism" in The Sunday Times of 22 April) makes the startling comment ".... In fact in the case of a broad range of statistics of production, they are either estimated through proxy figures and indirect imputations or simply estimates of persons like grama sevakas....." Ask 10,000 Colombo voters or anyone who voted in the famous Wayamba exercise of democracy, about the reliability of Grama Sevakas! I don't know about "proxy figures" - are they a synonym for "fudges"? But to get back to the remarkable assertions of the DG/CB, I quote with puzzlement the following passages for our readers to mull over. "..

The CB is required to adopt all measures to maintain a low rate of inflation in Sri Lanka..." "...Inflation rates have reached a record high of 20% but Wijewardena states that the core objective of the CB is to maintain economic and price stability...:" But then as he assures us "...economic growth and the general welfare of the people are two different things..."

Indeed it seems so, one goes up and the other down! "...... What matters is not the nominal interest rate but the real interest rate....." But then he tells us "... Therefore interest rates need not become a disincentive for investors to borrow...." Hands up all investors who agree - others remain quiet. Further interesting observations to which perhaps only economists are privy are "… money is created by the banking sectors in the form of bank deposits.."

" .. The per capita income will tell us if the cake is divided equally ..." Any comments from bakers or mathematicians? ".. in any growing economy, there is a bigger demand for money by the members of the public in order to undertake the volume of transactions.." " .. because their ambitions are higher than the actual value of their income generated by economic growth, hence they are always left a bit discontented..." But we are comforted by the promise that "... a high economic growth of about 8% and above continuously for a long period like 20 to 25 years so that the real welfare of people would grow faster than the enhancement of their ambitions..." We are also told about ".. volumes of energy.." and paddy and other vegetables". But these are trivial slips.

To allay my distress, I sought relief in an old Pelican paperback titled "Economics of everyday life". In this the author, Gertrude Williams offers the enlightening observation that " And moreover there is the added difficulty that the economic body is perpetually changing and that the economist is compelled to try to make his analysis while the very thing he is studying is in the process of becoming something else.." This may elevate Economics to the realm of Philosophy (as popularly understood) but then Plato's "Republic" may become a more useful guide to the State and for practical Governance than the Annual Report of The Central Bank of The Democratic Socialist Republic of Sri Lanka.